New to Mutual Funds? Tips for a beginner

For a first time investor in MFs, it is important to make a sensible first choice. Hemant Rustagi leads the way.

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New to Mutual Funds? Tips for a beginner

For a first time investor in MFs, it is important to make a sensible first choice. Hemant Rustagi leads the way.

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First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.

First things first..

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.

The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

Determine what your financial goals are.

Are you investing for retirement? A child’s education? Or for current income?

Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.

How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Fund Candy

Diversified equity funds

Index funds

Opportunity funds

Mid-cap funds

Equity-linked savings schemes

Sector funds like Auto, Health Care, FMCG, IT, Banking etc.

Balanced funds for those who are not comfortable with 100% exposure to equity

If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.

Keeping track..Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:

Fact sheets and Newsletters:MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.

Newspapers: Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.

Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.